Policy response key to assessing impact of political events: Fitch

LONDON

The trajectory of international reserves and macroeconomic policy settings will be key in assessing any sovereign credit implications of the recent political events in Türkiye, Fitch Ratings has said.

Stronger external buffers, including improved international reserves and reduced foreign exchange (FX) contingent liabilities, have underpinned the strengthening of Türkiye’s sovereign credit profile amid a more conventional and consistent policy mix since 2023, it said.

The Central Bank’s net foreign asset position shows that the reserve decline continued until 25 March, but has since eased, according to the ratings company.

Türkiye’s economic policymakers have responded by emphasizing their commitment to a policy mix characterized by a tight monetary stance and expected improvements in the consistency of income and fiscal policies, it said, noting that President Recep Tayyip Erdoğan also publicly reiterated his support for the existing economic program.

Fitch believes that Türkiye has the capacity to manage the current level of volatility given the stated commitment to the current policy mix.

“Our assumption that economic authorities, notably the Central Bank, have room to tighten monetary policy if necessary, a low current account deficit and stronger reserve buffers than during previous instances of stress.”

Fitch, however, warned that prolonged or increased uncertainty could weaken investor confidence, leading to periodic market volatility, sustained pressures on the lira and international reserves, deterioration of inflation and exchange rate expectations and higher dollarization.

"Further lira weakness would present risks to our most recent forecast that inflation will fall to 25 percent by end-2025,” it said.